On September 18, 2025, the Financial Accounting Standards Board (FASB) released Accounting Standards Update (ASU) 2025-06, introducing significant changes to how companies account for the costs of developing internal-use software. These updates aim to modernize the accounting for internal-use software.
Why the Change?
When FASB first issued its internal-use software guidance, most companies followed linear, stage-based development models. Today, agile and iterative methods dominate, making it harder to determine when to start capitalizing costs. The old rules, tied to project stages, no longer fit modern practices.
Key Updates in ASU 2025-06
The new guidance removes all references to project stages and introduces a simpler, principle-based approach. Companies can now capitalize internal-use software development costs once both of these conditions are met:
- Management has authorized and committed to funding the project, and
- It is probable that the project will be completed and the software will be used to perform its intended function (the “probable-to-complete” recognition threshold).
This shift means companies must exercise judgment when uncertainty exists, such as when software involves new technologies or unproven features.
Additionally:
- Website development costs will now fall under the same guidance (Subtopic 350-40), eliminating separate rules.
- Disclosure requirements for capitalized software will align with those for property, plant, and equipment, reducing complexity.
Effective Date and Transition Options
The new rules apply to annual and interim periods beginning after December 15, 2027. Companies can adopt the guidance:
- Prospectively (for new costs after adoption),
- Retrospectively (recasting prior periods), or
- Using a modified approach based on project status and whether software costs were capitalized before the date of adoption.
Early adoption is allowed, but only at the start of an annual reporting period.
What This Means for You
If your organization develops internal-use software or websites, now is the time to:
- Review capitalization policies to reflect the new “probable-to-complete” threshold.
- Plan your transition strategy—prospective, retrospective, or modified.
- Update disclosures to comply with the new requirements.
Need help navigating these changes? Contact us to ensure your financial reporting remains accurate and compliant.
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